Last week, Benjamin Tal a senior CIBC economist, released a report explaining
where the Canadian housing market is at, and mostly responding to the skeptics
touting that our home prices are super inflated and that we are in for a US style
housing crash.
Our housing industry has been compared to the US market ever since their
problems began. He said that, “ Not all is well with the Canadian housing system,
but any comparison to the American market of 2006 reflects deep
misunderstanding of the credit landscapes of the pre-crash environment in the US
and todays Canadian market.”
During the most recent years prior to 2006, qualifying for mortgages was quite
easy, and the underwriting was near criminal, and often times they were with a
lot of mortgages even being called “Liar loans”. Nearly a 1/3 of mortgage
originations in 2005 were subprime and Alt-A qualifying type mortgagors, while
20% of the entire US mortgage market in 2006 was non-prime type mortgages. To
add to its woes 80% of those clients had risky floating rates. In contrast, CIBC pegs
Canada’s subprime market at just 7%.
In 2006, 33% of US mortgages were already in negative equity positions, meaning
they owed more on their mortgage than their homes were worth. Tal said, “ More
than half had less than 5% equity, thus making Americans highly exposed to even
a modest decline in prices.” In Canada only 15-20% of new mortgage originations
has less than 15% equity, while the average Canadian has over 30% equity in their
homes.
Millions of Americans got low rate teaser mortgages (and only had to qualify for
the teaser rate payment) with rates that reset after two to three years, often
times 2-3% higher than their original rate, meaning their mortgage payments
could rise as much as 30-40% at reset time. In 2006-2007 alone, two trillion
dollars’ worth of US mortgages reset to the much higher rates. In Canada, if you
want to qualify for a variable floating rate then you would need to prove that you
qualify for a higher rate in advance, currently about 2.50% higher.
Tal on debt to income ratios, “As any economist knows, the debt-to-income ratio
is more a headline grabber than a serious analytical tool.” Various countries have
had much higher debt-to-income rations than Canada and have experienced
nothing remotely close to the US crash.
In the past four years, Canadian credit scores have improved, by contrast in the
four years leading up to the great recession, the ratio of risky US borrowers rose
by 10% and was 22% of the market.
All in all, Tal says that Canadian housing prices may fall slightly in some areas of
the country due to some government mortgage rule tightening and a softening in
the global economy but it won’t be to the extent or for the same reasons as our
neighbours to the south. This is just another reason to be happy we live in this
part of Canada where I don’t think we’ll feel much or any declines in pricing.
Jean-Guy Turcotte is an Accredited Mortgage Professional with Dominion Lending
Centres-Regional Mortgage Group and can be contacted for more information or
appointments at 403-343-1125 or emailed to jturcotte@regionalmortgage.ca